csis.org/media/csis/events/0 … tation.pdf
A balance sheet recession emerges after the bursting of a nationwide asset price bubble that leaves a large number of private-sector balance sheets with more liabilities than assets.
In order to repair their balance sheets, private sector moves away from profit maximization to debt minimization.
With the private sector de-leveraging, even at zero interest rates, newly generated savings and debt repayments enter the banking system but cannot leave the system due to the lack of borrowers.The sum of savings and debt repayments end up becoming the leakage to the income stream.
The deflationary gap created by the above leakage will continue to push the economy toward a contractionaryequilibrium until the private sector is too impoverished to save any money (=depression).
In this type of recession, the economy will not enter self-sustaining growth until private sector balance sheets are repaired.
Lots of scary charts…
Exhibit 28 is interesting for those who doubt the effectiveness of the New Deal in reducing unemployment. What is espectially interesting is that the budget deficit as a % of GNP didn’t exceed 6% and was more ususally 4% during the New Deal.
